1. Oil and the Global Economy
Oil prices were little changed last week as the European sovereign debt crises and the various upheavals and machinations taking place in the Middle East roiled the markets. NY oil closed at $96.77 and London at $106.40 -- both down about 1 percent for the week. As there seems to be no resolution to the underlying problems in sight, and the distinct possibility that either or both could get worse, the Middle East and the EU are likely to dominate oil prices for many months to come.
There was some news regarding the fundamentals of the markets last week. Platts calculated China's apparent oil demand for October and reported that it was up 1.4 percent over last October to 9.08 million b/d. This was the highest since last May and is about what could be expected from an economy that is still reported to be growing at 8+ percent. US crude stocks fell by 6.2 million barrels the week before last and distillate stocks fell by 800,000 barrels. We are starting to get scattered reports of diesel shortages around the world. With stockpiles down, US distillate exports way up in recent years, and conventional oil production stagnant, it seems possible that endemic distillate shortages are not too far away.
US gasoline prices have fallen by nearly 40 cents a gallon to an average of $3.31 since their recent peak in early September. Even with the recent declines prices are 44 cents a gallon higher than last year and consumption over the past four weeks is still down by 4 percent from last year. The Oil Price Information Service says Americans are on track to spend $488 billion on gasoline this year, up $40 billion from the record high of 2008 when the economy was in better shape.
An unusual amount of pessimism was expressed last week with China's Vice Premier for trade and finance calling the global economic situation "extremely serious." This was topped by IEA's Chief Economist, Fatih Birol, who said that current high oil prices could "strangle" global efforts at economic recovery.
2. Sanctioning Iran
In the wake of the IAEA report earlier this month alleging that Iran was still moving towards the development of nuclear weapons, the US and its allies announced further sanctions on Tehran last week. Rejecting calls to formally sanction Iran's central bank, an effort is being made to pressure governments and businesses in Europe, Asia, and Latin America to wind down their business ties with the Iranians and to reduce their purchases of Iranian oil in an orderly manner. The US declared the Iranian banking system a "money laundering" system in support of terrorism organizations and warned that any financial institution in the world doing business with it could face penalties if they want to do business with the US. So far the UK, Canada, Italy and France are supporting the new sanctions, with Paris asking Japan and the rest of the EU to stop doing business with the Iranians and purchasing their oil.
The US and its allies are drawing a fine line in attempting to reduce Tehran's $80 billion per year oil revenue while at the same time not driving global oil prices considerably higher which is what would happen if a significant portion of Iran's roughly 2.4 million b/d of exports came to a halt. The US and France do not import Iranian oil and the EU's energy commissioner says that those countries that do can find supplies elsewhere. The EU takes about 18 percent of Iran's exports. Italy, which imports 200,000 b/d from Iran -- about 13 percent of its fuel needs, is supporting the sanctions. Some EU members, however, are already saying they do not want to stop importing Iranian oil and Tehran is saying it can find ways to get around the embargo.
The stream of bluster from Tehran, which seems to have no intention of bowing to demands concerning its nuclear intentions, continues. The Iranians contend that the world cannot do without their oil and the embargo will be meaningless. The rest of the trade embargo may have more of an impact in more ways than one. Dubai is Iran's second biggest trading partner and 8,000 traders in Dubai deal in re-exporting goods to Iran. Should the bank system stop financing this trade there would be repercussions all over the Middle East.
The big question remains whether the problems in the Middle East will eventually engulf exports through the Straits of Hormuz. The situation in Syria continues to deteriorate with the Arab League imposing harsh sanctions on Damascus as it continues to gun down its domestic protestors. Lebanon and Iraq, which need Syria in one way or another, are not so sure that they want to go along with the new League sanctions. How all this comes out is impossible to predict, but the possibility of increasing regional instability looks likely. Even the Saudis had a small round of protests amongst their Shia minority last week.
3. Turmoil in Europe
Nearly everything went wrong in the Eurozone last week with bond auctions going bad, interest rates hitting unsustainable levels, and sovereign debt being downgraded. Even France is in peril of losing its triple A status. Hopes that the European Central Bank will bail everybody out by turning on the printing presses seem to be waning as the Bank's Board of Directors and the Germans remain adamantly opposed. European banking problems are being felt around the world as loans in Asia, Africa and Latin America are becoming harder and more expensive to get. Even the oil rich Middle East is starting to feel the financial pinch as rolling over debt is becoming more difficult. In the US, the cost of credit default swaps on US banks with exposure to Europe is soaring.
The latest plan is to draft a new "stability pact" that could be in place by the end of December and would spell out strict deficit rules and control rights for national budgets. Such a pact would bypass the cumbersome treaties which formed the EU and Eurozone, and allow for more centralized supervision of national budgets. Whether this plan will gain more traction than previous efforts remains to be seen, but European banks are preparing for the breakup of the Eurozone despite the continuing assurances from politicians that it will never happen.
As could be expected from all this uproar, predictions of a severe economic downturn in Europe are on the rise with many believing it will quickly spread around the world. For the time being all this uncertainty is keeping a lid on oil prices. We are clearly entering a year of much uncertainty with powerful forces poised to drive oil prices lower --- or much higher.
4. Saudi growth
What may turn out to be the peaking of Saudi oil production certainly deserves a mention in this publication. Last week Riyadh announced that pressure to increase its productive capacity from the current 12 million b/d to 15 million by the end of the decade has been falling. Therefore ARAMCO has halted the $100 billion expansion program that has been going on for the last 10 years. The Saudis are saying that increases of oil production in Iraq, in the waters off Brazil, and of tight oil from shale deposits around the world will be sufficient.
ARAMCO executives say their current priority is to increase natural gas production, but that they have several projects that are already pre-engineered and that can be brought online to offset declines in production from existing fields.
The announcement comes at a time of increasing social unrest across the Middle East with four being killed and nine wounded during clashes between Shiites and Saudi security forces in the oil-producing Eastern Province last week. Earlier this year Riyadh announced a major increase in social spending in order to forestall the unrest seen in so many other Middle Eastern countries with less than democratic governments. Some are suggesting the cut in capital spending on the oil industry is the result of a need to increase social and security spending still further. Others note that the steadily increasing oil prices are providing the country with steadily increasing revenues while saving whatever oil is left for future generations.
Whatever the case, it now seems unlikely that the Saudis will lead global oil production to spectacular new highs as many had predicted just a few years ago.
Quote of the week
"In its simplest form, Peak Oil means that just as oil production in the US peaked in 1970 and began to decline, so shall global production do the same. Once you get past that basic premise -- one in which there is near-universal agreement once people understand that is what you mean when you say "Peak Oil" -- there are many different opinions of exactly how events will unfold. The would-be Peak Oil debunkers are only addressing their arguments at one of the ways some people think this will play out, and then declaring that they have debunked Peak Oil."
-- Robert Rapier
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)